The Energy Tab

Your $11.00 Solyndra Dividend

 

By the "Rule of 50 Million" your share of the government's Solyndra loan guarantee scandal, as a taxpaying American family, is $11.00.

As everyone now knows, Solyndra created an innovative form factor for PV panels, and then deftly combined this with (by various reports) dreadful operational management and a wholly uncompetitive cost structure.  This amalgam then became a winning ticket for an Obama Administration stimulus loan guarantee. 

This federal largess was funded via a program initiated in the Bush Administration and authorized by the Energy Policy Act of 2005...the '05 EP Act being a fine example of -- wait for it -- bipartisan legislation.

I hold out the possibility that the Solyndra money flush, ultimately, may actually be a worthwhile expenditure.  And not just for the scavenger who ends up buying a new $535 million dollar factory for 4 cents +/- on the dollar at auction.

No, I'm referring to the value of this scandal as an enduring cautionary tale against government involvement in commercial ventures.  I was under the understanding that "everyone" knows that "government should not pick winners and losers."  Evidently this elemental notion needs to be reinforced.  So now "Solyndra" can be a pithy reminder that politicians doling out investment dollars to private companies is a really, really bad idea.

Indeed, I hope that the word will lead a handy new epigram, and that the phrase "Solyndra Democrat" will be a cutting insult for a would-be proponent of crony capitalism. 

And worse than a "Solyndra Democrat," of course, would be a "Solyndra Republican." 

$11.00 might be a reasonable fee if it reduces the future volume of politicians playing banker. And if not, at least we're getting an unusually delicious story line out of the deal to sit back and watch. A nearly insane investment thesis, pots of campaign dollars in play, a tidy electronic record, FBI raids, a President doubling down in support, and an incredibly fast time line from investment to failure -- it may not be Enron, but it's been entertaining so far.

 

 

How Republicans Mess Up Their Global Warming Sound Bites

Am I the only one who finds Republicans "views" on global warming to be maddening?

My complaint may be idiosyncratic, but I couldn't care less what the candidates "believe" about the climate system. I don't trust any of them to parse the science, and the chance that any one of them knows enough to teach me something is pretty much nil.

All I want to hear is what policies, if any, they are going to advocate in response to global warming. 

Mitt says he believes that the world is warming, and that humans are contributing to this warming.  Huntsman says, as far as I can tell, we should put our trust in the 95% of scientist who evidently agree on AGW.  Perry says that the evidence is unclear. 

None of these positions say anything about what a President would do to us in the name of Global Warming Climate Change.

Which is all I want to hear, thanks. 

 

An Energy Tab First: Defending the Obama Administration

I'm all about trying new things, so after 2 1/2 years I'm delighted to find I one thing from the Obama administration I can defend:  new CAFE standards.

The administration came under criticism by a variety of sources recently regarding CAFE mileage standards for the model years 2017-2025; reportedly the administration is considering a final target as high as 62 MPG.  The occasion for the most recent outburst was the release last week of a report by the respected Center for Automotive Research (CAR).  In it CAR calculated that a target of a CAFE standard of 62 MPG for 2025 would add $9,800 to the price of the average car and cost the auto industry a quarter of a million jobs due to reduced auto sales.

The Detroit News, Motor Trend, NRO, American Thinker reacted with horror and disgust; even the Autoblog Green was critical.

I think these complaints are knee-jerk and unfair.  As I previously wrote, CAFE standard have been a dud in both design and ambition for twenty years, but the new version are reasonable, (probably) effective, and economically justified.  The CAR report does not change my view.  A more nuanced view of the report, and the coming standards for 2017-2025, includes these perspectives:

Is This America's Best "Green" Regulation?

2011 Toyota Camry Hybrid, which scores a fuel rating of 31 city, 35 highway

What is America's best "green" regulation? 

Admittedly, this is as near a prettiest-girl-in-Maine contest as one can conceive. But not every federal green rule or program is lousy.

My nomination for best of the lot?  Federal vehicle fuel mileage rules, known as CAFE standards.  (Corporate Average Fuel Economy).

CAFE rules have been the law of the land since 1975, but have had only modest effect on the cars Americans purchased.   Until recently, the standards were rarely raised -- and never to hard levels. They excluded half of vehicles sold (trucks, SUVs, vans) and included numerous loopholes.  Penalties for non-compliance were modest.

The bipartisan 2007 Energy Act revamped the CAFE program to make it both more comprehensive and smarter.  It brought most trucks and SUVs more fully into the system, and raised targets for both cars and trucks substantially.  It also introduced a system to assign mileage targets by "vehicle footprint," with larger vehicles getting lower mileage bogies, reducing a bias to smaller cars -- and the companies that make them.

The Act set a fleet average target of 35 MPG by 2020 (vs. 25 today and 18 in 1978).  For 2021-30, the law charges the NTHSA, which administers CAFE, to set higher standards based on "maximum feasibility" with input from the National Academy of Sciences.

The Obama Administration has accelerated the adoption of these targets.  It established targets for 2012-2016 that end with a fleet target of 35.5 MPG -- 39 for cars and 30 for trucks.  Draft targets for model years 2017-25 will be announced by September 2011.  The Administration reportedly is evaluating MPG increases in the 3-6% per year range.  The high end of that range yields a MPG target of 62.

(A note about these figures.  Gas mileage figures for the CAFE fleet calculations come from different testing standards than those used for consumer "mileage stickers."  Some contend that real-life driving yields mileage ~20% lower than what results from the CAFE-specific test procedure.)

At a recent Energy Department conference, John German provided a remarkably upbeat outlook for the the coming changes induced by tougher mileage standards.  John is a veteran of Chrysler engineering and the EPA and is now with the International Council for on Clean Transportation. 

John's presentation, definitely worth a scan, made the following compelling points:

• Consensus government estimates for cars scoring MPG in the mid 50's by 2025 suggest an incremental cost of around $2,000.
• At a cost of $2,000, the payback period for fuel savings is 2.5 years -- an economic no-brainer.
• Studies show that consumers have trouble optimizing the gas mileage issue in a complex purchase decision like a new car purchase.
• Numerous complementary advances in internal combustion vehicles (better tires, transmissions, turbocharging, lighter weights, etc.) will likely be the cheapest and most utilized path to achieve the highest mileage standards, but advances in the cost effectiveness of other technology sets could surprise (hybrids, diesel).

For almost more than 20 years, CAFE regulations have been essentially dormant in terms of affecting vehicles sold.  Now they are poised to actually perform the core mission as originally conceived, which is to push automakers to adopt cost effective technologies to improve fuel efficiency. 

So what makes these regulations especially laudable? 

Here are my list:

• The regulations are directed at, and consistent with, a legitimate national interest: reduced petroleum usage.
• Arguably, market inefficiency exist that regulation can help mitigate, such as the full cost of gas not being reflected in its price (national security costs, pollution); consumers not placing a sufficient value of efficiency due to short ownership periods or purchase complexity.
• The regs probably lead to more fuel efficient vehicles being available at an economic incremental cost.
• Standards reduce uncertainty for producers regarding competitor offerings, and soften the competitive impact of swings in consumer demands relative to volatile energy prices.
• Over 35 years, the rules have evolved and improved in terms of effectiveness and intelligence; CAFE regulations pre-2000 were very poorly crafted.
• Standards are designed to be consistent with feasible and cost effective technological evolution.
• CAFE standards are very popular with citizens.
• Simpler, consumer oriented interventions to address the same goal, such as a gas tax, are not politically feasible.
• Penalties for failure to meet targets are modest -- $55 per 1 MPG for vehicle -- so the system is appropriately more a nudge to producers than a mandate, and the cost of the regs getting out of sync with what is feasible is pretty modest.

 

 

NJ Governor Quits Puzzling Regional Cap and Trade System

Yesterday NJ Governor Chris Christy announced that NJ would exit the 10 northeast state Regional Greenhouse Gas Initiative (RGGI). 

The RGGI is a puzzling regulatory system because it (and related state RPS standards) necessarily forces up energy costs in participating states, but delivers no benefits to the states, even if the initiative actually achieves its goals of a slight reduction in local CO2 emissions.

Christie chose to argue against the program on efficiency grounds, rather than play up the more meta issue of lack of benefits.  "This program is not effective in reducing greenhouse gases and is unlikely to be in the future. This program is not effective in reducing greenhouse gases and is unlikely to be in the future."

Like many "green energy" programs, the RGGI creates a slush fund from its cap-and-trade system to finance favored energy projects and interest groups.  In recent years states including NJ have raided the funds to finance general government programs. 

This spring the New Hampshire house voted overwhelmingly to exit the RGGI as well but the NH senate voted to remain in the alliance.  The Governor Lynch also favors staying with the RGGI, arguing that NH is just too reliant on the cash it generates. 

NJ and NH illustrate the competing forces in play for the RGGI.  While the program is not designed to produce tangible environmental benefits (but rather only statistical ones) it faces inevitable pressure from those paying its mounting costs.  Yet the cash generated from the program, even if only partially available for general spending, becomes increasingly addictive to state government. And the more of the program revenues taken from the system to fund general spending instead of green initiatives, the less effective the program becomes against even its relatively meaningless statistical goals. 

 

In a related previous post I noted that states with regional cap and trade, and RPS, programs also tend to correlate with states with anti-right-to-work (forced unionism) laws.  So it is interesting that while some states are moving away from these green energy regimes, movement is also picking up among some states to convert to right-to-work laws.  New Hampshire, Indiana, and Ohio are among states with some movement to change their current laws.

The Petroleum Age: 1960-2030

We live in the age of petroleum.  But we may live to see its end -- in just 19 years.

For hundreds of years, wood constituted the primary fuel (beyond food) for man's activities.  This changed for the first time around 1890, when coal became the world's dominant fuel.  Coal was top dog for 70 years, until 1960, when petroleum became the most utilized energy resource. 

This year, in its annual statistical outlook, BP predicts that the global petroleum age will come to a close in 2030, after a 80 year run.  By 2030, petroleum will give up it's mantle to...coal.  And natural gas.  (See: page 10.)

In 2030, BP predicts, petroleum will both provide about 27% of the world's energy, as will coal.  Natural gas will account for just a shade less, about 26%.  Nuclear, hydro, and renewables (including biofuel) will each contribute a near equal share of the 20 or so remaining points of share.

The latest International Energy Outlook by the EIA also projects coal to pass petroleum within the next 20 years as the primarily world fuel, although this is harder to see in its macro data because it adds petroleum with other sources like biofuels in a "liquid fuels" category. [page 2]

Petroleum's global "market share" has been on the downslope for over thirty years already.  It's share peaked in the late 1970's in the mid-40 percent range.  Growth in petroleum demand came largely from   widespread use in the transportation sector, especially in developed countries.  Coal's re-rise relates directly to the growing demand for electricity, particularly in emerging countries -- and in China in particular.  (More than half of the world's new coals power plants in the this period will be in China.) 

NG's use is growing more rapidly than coal (from a smaller base) with growth in electricity production as well as industrial uses.  Under BP's projections, the market share of NG will have doubled from its 1970 level by 2030.

The macro picture [p. xx] in the U.S., as painted by EIA, is similar in history but different in outlook.  In the U.S., petroleum usurped coal earlier, in the late 1940's.  But NG also passed coal, in the 1950's, as the #2 fuel, a status is has retained.  And in the U.S., EIA does not yet foresee any point in which petroleum is not our leading fuel source. 

These long term views of contributions by fuel source highlight the vast span of time that typically characterize energy markets.  Energy supply tends to work on nearly century-long time frames.  Something to keep in mind if one is banking on big roles for favored resources, or just resources du jour.

 

The Rapid Decline of Coal Fired Electricity

Salem Harbor Power Station.  Plant owner Dominion has announced plans to close the
750 MW coal/oil facility mid-decade upon implementation of EPA's new pollution rules.

Several factors are combining to spell a relatively speedy decline of coal fired electricity in the U.S.  The biggest:  four new EPA pollution control rules about to take effect, which will eliminate a fifth of existing U.S. coal generation capacity. 

These new rules are unrelated to EPA's new-found powers to pursue CO2 emissions.  Rather, they are directed at more traditional definitions of pollution, mainly from coal power plants:

• The "Transport" rule to update and deepen control of SOx and NOx
• The Hazardous Air Pollution (HAP) rule, directed primarily at mercury emissions from coal
• The coal combustion residue rule, aka " coal ash"
• The water quality / aquatic impact rule

These rules are in the late stages of development at EPA and will need to be be implemented (with grace periods) at existing plants over the next 5 years or so.  The fundamental implication is that these plants will need extensive and expensive upgrades of environmental controls.  Most of these controls are on smokestack emissions -- a third of coal plants have no significant pollution controls.  The water rule requires fish screens and, in some cases, cooling towers. 

Industry watchers predict that this collection of new regs will create compliance costs of a couple hundred billion dollars at the existing fleet of coal plants.  Eventually the upgrades will lead to an increase in the cost of power from these plant of 20-30%.  The industry is forecasting the closure of  50-100 GW of capacity at plants where upgrades will be uneconomic, or about 22% (midpoint) of current coal nameplate capacity.

What Would the Price of Oil Be If We "Lost" Saudi Arabia?

Last week, a former Saudi oil minister put an estimate on what big-time unrest in Saudi Arabia might mean to world oil prices:

"If something happens in Saudi Arabia it will go to $200 to $300. I don't expect this for the time being, but who would have expected Tunisia?" [Sheikh Zaki] Yamani told Reuters on the sidelines of a conference of the Centre for Global Energy Studies (CGES) which he chairs.

Which got me thinking. What would be the fundamental price implication of "losing" all of Saudi Arabia's oil?  What if unrest there totally shut down output for the foresable future?  What kind of oil market Armageddon would result? 

How Would We Recognize an Actual Energy Security Initiative?

Nixon -- our first President to promise oil security

Wednesday President Obama gave a speech at Georgetown University to unveil an major "energy security initiative," which the White House played up as a big deal.

We will, Obama said, reduce our imports of petroleum by one-third by 2025. 

While the goal is new, the initiatives mentioned to support the goal are not.  In sum they are:

1. Produce more domestic oil, through sets to accelerated permitting and development.
2. Encourage and subside more biofuels, both existing ethanol and new forms, particularly cellulose-based.
3. Make vehicles more efficient, primarily through existing automobile mileage standards, and new ones for trucks.
4. Continue development of alternative-fuel vehicles, mainly electric-drive for consumers.  Encourage fleets to consider alternative fuel vehicles.
5. Continued investment in R&D on new fuel technologies.

If "Energy Security" is your hobby-horse, the speech included nothing to get excited about.  The plan's components are all existent.  In fact, all the programs date back to the Bush Administration;  every one of them was included in the Energy Security and Independence and Security Act of 2007 (which also infamously outlaws conventional light bulbs).  While Obama can fairly take credit for amping up some of these programs, the jury is still out on whether the Administration has, or intends to, deliver on accelerated oil exploration.  

The Energy Tab House Snags Efficiency Honor

The Energy Tab house under construction, 2003

Recently local natural gas supplier National Grid initiated a program to track users' energy consumption in relation to their neighbors. 

Each month, consumers get a rolling 12 month summary of their usage compared to the average, and the 80th perctile, of his neighbors.  Neighbors are defined as "approximately 100 occupied nearby homes that are similar in size to yours and have gas heat."  On my report that average was 5,340 sq. ft.

The results for winter 2010-11 are in, and it appears that the Energy Tab house is among the most efficient -- and quite possibly the most efficient -- in the 'hood.  For the period December through February, consumption of fuel is below.  (I've pro-rated our usage to adjust for our size differential vs. the average home.)

Surveying the Damage From "Green Jobs"

Among the periodic services of The Energy Tab:  highlighting the fallacy that uneconomic "green energy job" subsidies can improve the economy.

Recently American Enterprise Institute's Kenneth Green surveyed the literature on economic costs to green subsidies in various European countries.  Here's a summary of his findings:

• In Denmark, which made relatively enormous investments in wind assets, consumers pay the highest electricity rates in Europe.  Green investments were estimated to have reduced the GDP of this country of 5 million by $270 million.
• In Germany, which invested substantially in solar PV and wind, green infrastructure is associated with a 7% increase in electricity costs.  Government green subsidies on a per-worker basis come out to $240,000 each.
• In Italy, the capital investment required for each job created is estimated to be 5-7 times as large as the average Italian job.  The government system of green project subsidies is seen as rife with corruption. 
• Spain, which has nearly(?) bankrupted itself in an orgy of residential construction and "infrastructure" spending on roads, bullet trains, windmills and solar PV, has managed to spend $750,000 for each incremental "green" job.  Analysts calculate that each new green job has cost the rest of the economy 2.2. jobs.  Higher electricity costs have hurt manufacturing in particular.  Shockingly, corruption has sprung up among all the subsidy programs. 

Our "Energy Problem"

Yesterday CNBC Squawk Box host Joe Kernan was discussing America's "energy problem" with a large fund manager.  The pair managed to conduct the entire segment without actually defining our "energy problem," which I found highly agitating.  

Which one fundamental "energy problem" would that be, I wondered: 

Electricity Groupon

Some companies deserve admiration just for the novelty and cleverness of their business.  Like Groupon.

Groupon is a pioneer of mass deal-of-the-day coupon.  To local subscribers Groupon emails its offer of 50+%  off some product or service; if enough subscribers accept the offer, the deal goes forward.  Buyers of groupons get unusually deep discounts; vendors get a guaranteed dose of new customers, albeit at low or negative margins for these initial exposures.  Groupon keeps a full 50% of a coupon price.  Simple.  Compelling all around.  And now worth billions.

Another clever company, in the energy sector?  EnerNOC. 

EnerNOC is a pioneer in electricity "demand response."  Like Groupon, EnerNOC is a marketing middleman.  It signs up thousands of mid-size commercial and industrial entities.  These outfits agree to reduce their electricity usage by a set amount a few times a year, during periods of extreme peak demand.  EnerNOC then bundles and sells these promises of "negative megawatts" to electric utilities and grid operators.

Now That's Uncompetitive: Electricity in Northeast Wouldn't Be Particularly Cheap Even If It Were Free

Residential electricity distribution costs in Massachusetts recently were 8.3 cents per kWh on my NSTAR bill.  This is just the cost of delivering juice; the expense of generating electricity is extra.  (Total cost:  16 c/kWh.)

Fun Fact?  In 4 U.S. states, the TOTAL cost of residential electricity is less than just the electricity distribution costs in the Commonwealth. Yes, even if electricity generation were free here, four states would be even cheaper:  Idaho, Utah, North Dakota, and Washington.  Ten more states have total electricity prices within just 1 cent per kWh of Massachusetts's distribution costs.  So about a quarter of the country gets its electricity for the cost that consumers in MA are charged just to move electrons around.

Massachusetts is not alone in this distinction; all state from New Jersey north share similar cost structures.

That electricity in the Northeast region is expensive is not news to any energy observer.  Delivered power here is typically 50% or more expensive than the average cost in the contiguous U.S.  If the Northeast were as uncompetitive in its gasoline prices as with electricity, pump prices here would be $4.70 a gallon now, instead of the U.S. average of $3.15.

Why so uncompetitive?

The President's Rx for a More Competitive U.S.? Higher Electricity Prices

 

Quick:  Make a list of America's top 10 problems.  Did "electricity supply" make your tally? 

I thought not.

But last week our President elevated an evidently problematic electricity regime to top issue-status, calling for more regulation and higher electricity prices in his State of the Union address:

Now, clean energy breakthroughs will only translate into clean energy jobs if businesses know there will be a market for what they’re selling.  So...tonight, I challenge you to join me in setting a new goal:  By 2035, 80 percent of America’s electricity will come from clean energy sources.

Some folks want wind and solar.  Others want nuclear, clean coal and natural gas.  To meet this goal, we will need them all -- and I urge Democrats and Republicans to work together to make it happen. 

The President's goal is actually a dramatic departure from our current electrical generation profile, as well as from where we seem to be headed on a status-quo basis: